2001 Ruling 2001-0073483 - Article XIII of the German Convention

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Application of Article 13 of the Canada-Germany Income Tax Convention to the disposition of an interest in a Canadian general partnership held by a German limited partnership.

Position: Treaty exempt pursuant to paragraphs 4 and 5 of Article 13 of the Canada-Germany Income Tax Convention.

Reasons: The value of the interest in the Canadian general partnership is not derived principally from immovable properties situated in Canada (paragraph 4 of Article 13 of the Canada-Germany Income Tax Convention). Similar to previous rulings.

XXXXXXXXXX                                2001-007348

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence in connection with your request.

XXXXXXXXXX files his tax returns at the XXXXXXXXXX Tax Services Office and his social insurance number is XXXXXXXXXX has not filed any Canadian tax returns.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

(i) is in an earlier return of the above named taxpayers or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,

(iii) is under objection by the taxpayers or a related person,

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Definitions

In this letter, the following terms have the meanings specified:

a) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended as at the date hereof, and any reference to any Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;

b) "adjusted cost base" has the meaning assigned by section 54;

c) "taxable Canadian property" has the meaning assigned by subsections 115(1) and 48(1);

d) "Mr. X" meansXXXXXXXXXX;

e) XXXXXXXXXX;

f) XXXXXXXXXX;

g) "Foreign LP" means XXXXXXXXXX;

h) "Foreign Holdco" means XXXXXXXXXX; and

i) "Foreign Opco" means XXXXXXXXXX.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. Mr. X is an individual resident in Germany for Canadian tax purposes and for purposes of the Canada-Germany Income Tax Convention (the "German Convention").

2. Foreign LP is a limited partnership created under German law. Mr. X owns XXXXXXXXXX% of the limited partnership interest in Foreign LP. Foreign Holdco, which was incorporated under German law and is a corporation resident in Germany for German income tax purposes and for purposes of the German convention, is the general partner of Foreign LP, but it owns no participating interest in Foreign LP.

3. Foreign LP owns a XXXXXXXXXX% interest in XXXXXXXXXX, a general partnership created under the laws of XXXXXXXXXX, which actively carries on the business of XXXXXXXXXX. The other XXXXXXXXXX% interest in XXXXXXXXXX is owned by XXXXXXXXXX, a corporation resident in Canada.

4. The major assets of XXXXXXXXXX are:

(i) XXXXXXXXXX; and

(ii) premises, machinery and equipment used to XXXXXXXXXX.

XXXXXXXXXX other assets of significant value consist of accounts receivable and inventories.

5. XXXXXXXXXX.

6. Foreign LP also owns substantially all of the issued and outstanding shares of Foreign Opco, a German corporation, which carries on the business of XXXXXXXXXX Foreign Opco is a large operating company and the fair market value of its direct or indirect interests in "taxable Canadian property" constitutes an insignificant proportion of the fair market value of its total assets.

7. The value of Foreign LP's interest in XXXXXXXXXX is estimated to be approximately $XXXXXXXXXX, which is significantly in excess of the adjusted cost base of its interest. However, the value of Foreign LP's interest in XXXXXXXXXX is (and has been throughout the previous XXXXXXXXXX period) significantly less than XXXXXXXXXX% of the value of all Foreign LP's assets.

8. Foreign LP's interest in XXXXXXXXXX is taxable Canadian property.

9. Foreign LP's interest in Foreign Opco is not taxable Canadian property.

10. Mr. X and Foreign Holdco's interests in Foreign LP are not taxable Canadian properties.

Proposed transactions

11. It is proposed that at a meeting of the general partner of Foreign LP on XXXXXXXXXX the partnership will resolve to be reorganized under German commercial law into a German corporation (a "GmbH"). You have been advised by legal counsel in Germany that under German commercial reorganization law and tax law it is possible to make application to the German commercial court to change a limited partnership (a "KG") into a GmbH. The GmbH will be constituted with issued share capital (owned by Mr. X) and all the other characteristics of a GmbH. The intention of Foreign LP is to make application to the German commercial court prior to XXXXXXXXXX. Where such application is made the German court will authorize (for administrative ease) the conversion to be effective on XXXXXXXXXX for German tax and commercial purposes.

12. Immediately after the conversion of Foreign LP into a GmbH, Foreign Holdco will be wound up.

13. Prior to the conversion of Foreign LP into a GmbH, Foreign LP will apply for a clearance certificate under subsection 116(1) of the Act in respect of the disposition of its interest in XXXXXXXXXX arising as a result of the conversion of Foreign LP into a GmbH.

14. After the above transactions, Mr. X will own all of the issued and outstanding shares of the GmbH resulting from the conversion of Foreign LP into a GmbH and this GmbH will own a XXXXXXXXXX% interest in XXXXXXXXXX and substantially all of the issued and outstanding shares of Foreign Opco.

Purpose of the proposed transactions

The conversion of Foreign LP into a GmbH is being done for certain estate and succession planning purposes. XXXXXXXXXX, Mr. X's goal is to transfer his interest in Foreign LP to XXXXXXXXXX. Such transfer would occur either during the lifetime of Mr. X or via his will. Under German law, however, the XXXXXXXXXX cannot engage in any direct business activity and, therefore cannot participate in any business as a partner. However, the XXXXXXXXXX can hold investments (other than interests in partnerships) and earn investment income. Therefore, it is necessary to convert Foreign LP to a GmbH so that the XXXXXXXXXX will be able to accept the contribution of the shares when the transfer is made.

Furthermore, you have been advised by legal counsel in Germany that German inheritance tax of a significant sum can be avoided if Mr. X were to die holding shares of a GmbH which are contributed to the XXXXXXXXXX by the terms of his will.

Rulings given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. Provided that the assets of XXXXXXXXXX are substantially the same as described in paragraphs 4 and 6 above, at the time of the conversion of Foreign LP to a GmbH, Foreign LP's interest in XXXXXXXXXX will not derive its value principally from immovable property within the meaning of that term in paragraph 4 of Article 13 of the German Convention.

B. As a result of the proposed conversion of Foreign LP into a GmbH mentioned in paragraph 10 above, there will be a disposition of Foreign LP's interest in XXXXXXXXXX; a disposition of Foreign LP's interest in Foreign Opco; a disposition of Mr. X's interest in Foreign LP; and a disposition of Foreign Holdco's interest in Foreign LP.

Any gain realized by Foreign LP from the disposition of its interest in XXXXXXXXXX will be exempt from taxation in Canada pursuant to paragraph 5 of Article 13 of the German Convention. Any gain realized by Foreign LP from the disposition of its interest in Foreign Opco and any gain realized by Mr. X and Foreign Holdco from the disposition of their interest in Foreign LP will not be subject to Canadian income tax.

C. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

Nothing in this advance income tax ruling should be construed as implying that we are ruling on:

a) the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares referred to herein; or

b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

The above rulings are given subject to the general limitations and qualifications set out in information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch